Embodiments of the present invention generally relate to systems and methods for creating different financial interests in a portfolio of stocks, a stock index or other financial assets (i.e., underlying reference assets) based on a series of interim cash flows of the underlying reference asset(s). Specifically, the present invention relates to systems and methods for dividing such assets into a plurality of components that are separately tradable. In one embodiment, a first component is an ordinary dividend component of one or more underlying reference assets (i.e., ordinary dividends paid for a fixed time period or until a fixed dollar amount has been paid) and a second component includes both the capital (e.g., appreciation/depreciation of the underlying reference assets) and the non-ordinary dividends (e.g., non-ordinary cash dividends, stock dividends, etc.) of the underlying reference assets. However, alternate methods of dividing the asset components may be substituted including, without limitation, separating all dividend components (ordinary and non-ordinary) from the capital component of the underlying reference assets. Or, separating the dividend component of only a first portion of the underlying reference assets from the capital component of all underlying reference assets and the dividend component of a remaining second portion of the underlying assets. The systems and methods described herein may be utilized to implement many variation of component splits without departing from the scope hereof. As used herein, “ordinary” and “non-ordinary” do not have predefined meanings. For example, what is deemed to be an “ordinary” dividend and a “non-ordinary” dividend may be determined, for example, by the legal documents associated with the income and/or equity trusts issuing the units, Chicago Board Options Exchange (“CBOE”), etc. and the definition of “ordinary” and “non-ordinary” may therefore vary between differing applications of the present invention. As used herein, these terms are not intended to be limiting.
There are generally two forms of financial return related to investment products: i) growth through capital appreciation of the underlying investment, and ii) income through dividends or, in the case of fixed income securities, interest payments. Both are important parts of investment strategies. However, many investors have different investment utility (preference) for one or the other based on their need for current income or potential capital appreciation.
In general, equity investments in common stocks or stock indices typically provide a combination of both equity (growth) and income. However, depending on an investor's time horizon and goals, strategies that favor one over the other might be best suited. For example investors who have a very long time horizon are often more risk-tolerant and tend to need less current investment income for living expenses. By contrast, an investor in retirement may have greater need for current income and less need for long-term capital appreciation.
Traditional investing often requires an investor seeking more income to assume more risk in their portfolio through leverage, industry sector concentration, credit concentration, credit degradation or some combination of some or all of these. By contrast, investors seeking greater capital appreciation often assume greater risks either through sector concentration or via leverage provided either explicitly through margin or implicitly via options markets.
As depicted in FIG. 1A, traditional investing has long relied upon investment in assets 113 such as fixed income investments (such as notes and bonds), stocks including dividend paying stocks, indexes, and exchange traded funds. Yet the cash flows from these securities have not effectively been separated in the way that, for example, STRIPS in the 1980s separated the cash flows for bond investments. Thus regardless of the investment goals, both equity investors 110 (capital appreciation) and income investors 111 (dividend) have been required to buy traditional securities through a financial exchange 112 (e.g., the New York Stock Exchange, the National Association of Securities Dealers Automated Quotations Exchange (“Nasdaq®), etc.). These securities can inherently carry growth or dividend risks that an investor might not want to assume. However, to date, these growth and income characteristics of finance exchange-traded securities have been locked together.